Chesapeake relies on gas and its byproducts such as ethane
for 90 percent of its production, and gas prices in the second
quarter were down 46 percent from a year ago. That will probably
force the company to lower its 2012 operating cash flow
forecast, said Mark Hanson, an analyst at Morningstar Investment
Services in Chicago.

McClendon has pledged to raise as much as $20.5 billion by
the end of next year to fund drilling and maintain debt
covenants. Without the sales, the cash-flow gap will widen to
$18.6 billion by the end of 2013 and force Chesapeake to cancel
drilling projects and reduce production targets, said James Sullivan, an analyst at Alembic Global Advisors in New York.

“They will get the asset sales done this year that they’ve
promised to, but the question is 2013 -- where do they go from
there after they’ve sold all the best stuff they had to offer?”
Hanson said. “The leash will be much shorter and McClendon’s
options much more limited.”

The Oklahoma City-based company is scheduled to announce
second-quarter results after U.S. stock markets close today. Net
income excluding one-time gains and losses is estimated by
analysts to fall more than 80 percent to $99.6 million from $571
million a year earlier, based on data compiled by Bloomberg.

Leadership Shakeup

Chesapeake’s market value plunged to a three-year low in
May as a glut-driven slump in gas prices squeezed the company’s
cash flow and forced McClendon to accelerate the pace of asset
sales. Gas prices have recovered from a 10-year intraday low of
$1.902 in April, closing Aug. 3 at $2.877 per million British
thermal units in New York. That’s still well below highs of more
than $13 in 2008.

Investors have battered Chesapeake stock amid two federal
probes of potential conflicts between the CEO’s personal
financial transactions and corporate duties. McClendon, 53, was
forced out as chairman in June and more than half the board was
replaced as Chesapeake’s largest shareholders, Southeastern
Asset Management Inc. and Carl Icahn, agitated for governance
reforms.

McClendon also is losing access to a corporate perk that
allowed him to buy personal stakes in almost every well the
company drilled. The U.S. Internal Revenue Service and
Securities and Exchange Commission are conducting inquiries.

Land Rush

Chesapeake fell 1 percent to $17.70 at the close in New
York.

The company is selling oil- and gas-rich rock formations as
major international explorers including Chevron Corp. (CVX) and Exxon
Mobil Corp. (XOM) have amassed drilling rights in onshore U.S.
prospects they previously ignored as marginal.

During the past decade, domestic explorers such as Devon
Energy Corp. (DVN) and Chesapeake perfected intensive drilling
techniques to crack shale formations, triggering a land rush
from the Rocky Mountains to the Gulf Coast to Appalachia.

McClendon’s effort to shift Chesapeake’s production away
from gas and more heavily toward oil and gas byproducts such as
ethane and propane has been undercut by a growing glut of gas
liquids from shale formations in Texas and Pennsylvania.

Ethane, a hydrocarbon that is stripped out of the gas
stream before the fuel is pumped into pipelines, averaged 40
cents a gallon during the second quarter, 48 percent less than a
year earlier. Ethane reached a 3-year high of 95 cents a gallon
as recently as October, according to data compiled by Bloomberg.

Oilfield Demand

Demand for oilfields has been spurred as crude tripled to
more than $95 a barrel in the past decade. West Texas
Intermediate crude, the benchmark U.S. grade of oil, has
averaged $98.83 a barrel this year, compared with $26.15 in
2002, according to data compiled by Bloomberg.

McClendon said in a March interview that the most-valuable
asset he’s offered for sale this year, 1.5 million acres in the
Permian Basin of Texas and New Mexico, may fetch at least $5
billion, or the equivalent of $3,333 an acre.

“The demand for oily plays such as the Permian is impacted
by oil prices,” said Michael McMahon, managing director of the
energy investment team at Pine Brook, a New York-based private-
equity firm. “As long as oil is in the mid $80s or higher,
there’s still a good profit to be made. Oil has to go to the low
$70s for that region to become unattractive.”

‘Promising Areas’

The property probably won’t garner as high a price as the
$7,000-an-acre Devon received last week for Permian stakes sold
to Japan’s Sumitomo Corp. (8053) because the geology of Chesapeake’s
holdings hasn’t been as extensively mapped as Devon’s, which
makes it riskier to explore, Alembic Global’s Sullivan said.

The Permian Basin fields account for the equivalent of 332
billion cubic feet of Chesapeake’s proved reserves, Manuj Nikhanj, head of energy research at Investment Technology Group
Inc. in Calgary, said in a July 10 note to clients. That would
equate to about 11 percent of Chesapeake’s total proved
reserves, based on U.S. Securities & Exchange Commission data.

Chesapeake’s Permian fields are “promising areas, but we
have little data from Chesapeake about them,” Sullivan said.

McClendon considered quitting the Permian Basin once
before, when he announced plans in September 2002 to pursue
lower-cost prospects in the U.S. Midwest instead. Fifteen months
later, he changed course with a $420 million acquisition
including wells in the Permian from closely-held Concho
Resources Inc. (CXO)

Mississippi Lime

McClendon also is counting on a cash infusion this year
from a potential joint-venture agreement to develop a formation
known as the Mississippi Lime in Oklahoma and Kansas.

Since 2009, Chesapeake has drilled 130 horizontal wells in
the Mississippi Lime, where wells are half the cost of those in
the Bakken shale of North Dakota and Montana, the company said
in a July 16 presentation posted on its website. The company had
22 rigs operating in the Mississippi Lime as of last month.

Any deals announced today would be in addition to the $6.6
billion in transactions already signed this year.